Cyber Risk, Market Failures, and Financial Stability
IMF Working Papers, August 7, 2017
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- Cyber Risk, Market Failures, and Financial Stability
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Bibliographic details
- Authors: Emanuel Kopp, Lincoln Kaffenberger, Christopher Wilson
- Published: August 7, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484313787.001
Summary
- Cyber-attacks on financial institutions and financial market infrastructures are becoming more common and more sophisticated.
- Risk awareness has been increasing, firms actively manage cyber risk and invest in cybersecurity, and to some extent transfer and pool their risks through cyber liability insurance policies.
- The paper considers the properties of cyber risk, discusses why the private market can fail to provide the socially optimal level of cybersecurity, and explores how systemic cyber risk interacts with other financial stability risks.
- The study examines current regulatory frameworks and supervisory approaches, and identifies information asymmetries and other inefficiencies that hamper the detection and management of systemic cyber risk.
- The paper concludes by discussing policy measures that can increase the resilience of the financial system to systemic cyber risk.
Findings on the nature of cyber risk and market failures
- Cyber risk properties: increasing frequency and sophistication of attacks; firms investing in cybersecurity; partial risk transfer via cyber liability insurance.
- Private market shortcomings: the private market can fail to provide the socially optimal level of cybersecurity (market failure identified).
- Information problems: information asymmetries and other inefficiencies impede detection and management of systemic cyber risk.
Interaction with financial stability risks
- Systemic cyber risk can interact with other financial stability risks (paper explores these interactions and implications for system resilience).
Regulatory and supervisory analysis
- Examination of current regulatory frameworks and supervisory approaches with emphasis on:
- Gaps and limitations that hinder detection and management of systemic cyber risk.
- The role of information asymmetries and inefficiencies in regulatory/supervisory effectiveness.
Policy measures and recommendations
- Concludes with discussion of policy measures aimed at increasing the resilience of the financial system to systemic cyber risk (measures are focused on addressing market failures, information asymmetries, and supervisory gaps).
Content in this bundle
- Cyber Risk, Market Failures, and Financial Stability, WP/17/185, August 2017